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BRICS+ Local Currency Trade
Context:
The BRICS+ group (Brazil, China, Egypt, Ethiopia, India, Iran, Russia, South Africa, UAE) is exploring trade in local currencies to reduce reliance on dominant global currencies like the US dollar. This effort, while promising, faces several economic and structural challenges.
Why BRICS+ Countries Want Local Currency Trade:
- Economic Reasons:
- Reduces transaction costs by avoiding conversion into foreign currencies.
- Lowers dependence on major currencies like the US dollar and euro, which are difficult for some countries to access.
- Eases financial burdens for countries with weak, non-convertible currencies, like Ethiopia’s birr.
- Political Reasons:
- Offers freedom from sanctions tied to systems like SWIFT, enabling countries like Russia to bypass restrictions.
- Provides an alternative to sanctions imposed by major economies that control global financial systems.
Key Challenges Facing Local Currency Trade:
- Limited International Demand: Most BRICS+ currencies are not widely accepted or convertible outside their home markets.
- For example, Indian rupees accumulated by Russia can only be spent in India, limiting utility.
- Economic Imbalance: Many BRICS+ nations are net exporters and face challenges in accumulating trade partner currencies.
- Fragmentation Risk: Emerging payment systems like BRICS+ Clear and China’s Cross-border Interbank Payment System (CIPS) risk creating inefficiencies if not integrated globally.
Existing Examples of Local Currency Trade:
- Southern Africa: South African rand plays a regional role in the Southern African Customs Union.
- India-Russia Trade: Russia exports oil to India in exchange for rupees, but excess rupee reserves remain underutilised.
- China’s Barter Trade Model: China exchanges industrial goods for local currencies and uses them to buy local products, creating a circular trade flow.
- Ethiopia-China Trade: Profits in Ethiopian birr are reinvested locally or used to purchase Ethiopian goods like coffee, later exported to China.
Potential Solutions for Structuring Local Currency Trade:
- Incremental Implementation: Start with a portion of trade in local currencies, building systems and trust gradually.
- Fast Digital Payment System: Develop a secure, efficient system to calculate and balance currency demand among members.
- Centralised Coordination: Create uniform standards for digital platforms to ensure compatibility and minimise costs.
- Adapt to Regional Needs: Consider that some members, especially in Africa, may not see immediate benefits from shifting away from SWIFT.
